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Consumer Wage Growth Could Bode Well For Commercial Real Estate In 2018

For the past eight years, there has been a gap between the growth of the economy coming out of the recession and the reflection of that growth in employee wages.


Stagnant wage growth, which Colliers International reports can stifle gains in the multifamily and retail sectors of commercial real estate, pivoted in December. Economists anticipate American workers will receive a 3% pay raise overall this year, according to CNN. Employers raised wages an average 0.3% month-to-month in December compared to November's 0.1% increase. This uptick comes at a time when job growth, though strong, is slowing and the hunt for qualified talent is on.

“It’s starting to percolate,” Reis Chief Economist Victor Calanog said. “The big determinant of wage growth is productivity of workers — labor productivity. It spiked in Q3 year-over-year, something we haven't seen in some time.”

Should the increase in wage growth persist, it could translate to higher consumer spending, providing a boost to both retail and apartment landlords — though forecast headwinds in the multifamily sector may cancel out any added benefits wage growth could bring.

“Wage growth has an impact on the overall economy and can [be] beneficial in boosting retail sales, providing additional income to support housing choices and improving the overall quality of life for the employees,” Yardi Matrix Director of Research and Publications Jack Kern said. 

Why So Lackluster 

Typically, rising inflation, coupled with a tight labor market, is the perfect formula that pressures employers to raise wages. But inflation has been relatively sluggish this past year, inching above the Federal Reserve’s 2% goal to 2.1% in December.

Job growth, though robust, continues to slow as the search for qualified talent becomes increasingly difficult. U.S. employers added about 148,000 jobs in December, down from the monthly average of 250,000 payrolls added in 2014 and 2015. Unemployment held steady at 4.1%, a 17-year low.


The scarcity of workers, which is reverberating through the construction industry and other facets of real estate, is being exacerbated by retiring baby boomers, Colliers International Chief Economist Andrew Nelson said. That is directly impacting wage growth stats.

“One thing to bring up is the composition of both jobs and the workforce are changing. A lot of baby boomers who are retiring and leaving the labor force tend to be at the higher end of the income spectrum. They’re being replaced by younger workers who come in at the lower levels,” Nelson said. “The labor force is less experienced, so their wages are lower.”

Why The Real Estate Industry Should Care

Should employees experience an increase in wage growth this year, retail and multifamily operators would be the biggest beneficiaries, Kern said. 

Higher wages often lead to increased discretionary spending at clothing, electronics and other non-necessity retailers, all of which could benefit mall owners at a time when retailers are filing bankruptcy and shuttering stores by the hundreds.

“The fact that last holiday season did so well at the retail level demonstrates that the strength of wage growth is more valuable now than anybody estimated it would be,” Kern said. “Going forward, I would expect to see more of the same.”

Kern said wage growth could also indirectly stimulate the office sector. With wages spurring a boost in consumer confidence, employees will be more willing to stay put and work in their jobs longer.

As for multifamily, in a perfect world the sector would benefit from a spike in consumer wage growth, Calanog said. But new supply will likely stifle any gains experienced by landlords this year. 

This year’s aggressive construction levels and apartment pipeline will be very similar to 2017, Colliers reports, and are expected to hurt occupancy and lower rents.

“Landlords can’t raise rents right now if new competition is rising in the next quarter,” Calanog said. “Rising competition is likely to blunt any rent increases.”